By Joy Blenman and the Sun Life team
A Registered Retirement Income Fund (RRIF) is a way to convert retirement savings into income. But what is it, and how does it work? Here’s everything you need to know.
Most Canadians understand the importance of contributing to their RRSP. However, less is known about what to do to disburse it.
The RRSP is a good retirement savings tool, but it has an expiry date. The law requires that you convert your RRSP before December 31 of the year you turn 71. However, if you opt for a cash withdrawal, that income could come with a hefty tax bill.
So what’s the best solution for your retirement savings when you reach 71? The answer may be to transfer your RRSP to a Registered Retirement Income Fund or RRIF.
In this article, we will answer the following questions about the RRIF:
What is an RRIF, and how does it differ from an RRSP?
How much should you withdraw from your RRIF each year?
At what age should you start withdrawing funds from your RRIF?
What if you don’t need your RRSP money right away?
How do I transfer money into an RRIF?
When should you convert your RRSP to an RRIF?
Can you convert your RRSP to an RRIF before you turn 71?
How does the taxation of RRIF withdrawals work?
Questions about RRIFs? Find an advisor to help you.
What is an RRIF, and how does it differ from an RRSP?
Think of the RRIF as your RRSP’s big brother. There are several similarities between the two regimes. As with an RRSP, with an RRIF, you can:
take advantage of a tax deferral on funds placed in an RRIF while they continue to grow;
choose from various types of investments, for example:
mutual fund,
guaranteed investment certificates (GICs),
GIC insurance;
segregated fund contracts;
other options that fit your risk tolerance and overall financial plan.
Financial advisor KevinPotvin points out that the RRIF:
gives you the flexibility to withdraw some of the funds if you need to;
continues to grow your investments and defer your tax bill.
You can hold more than one RRIF, and you can withdraw more than the minimum if necessary. Just keep in mind that this will have the effect of depleting your RRIF more quickly.
Watch: What is an RRIF? (video)
How much should you withdraw from your RRIF each year?
When it comes to withdrawals, the RRIF differs from the RRSP. The RRIF requires minimum annual withdrawals based on your age. It would help if you continued these withdrawals until the funds were exhausted.
With the RRIF, you will pay tax on the money withdrawn. In comparison, in your RRSP, the money could accumulate tax-free. Your taxes are deferred to a “later time” as long as your money remains in the RRSP. By converting it to an RRIF and making regular withdrawals, that “later time” becomes now.
The Canada Revenue Agency (CRA) has established a table of mandatory withdrawal factors for RRIFs. The financial institution that purchased your RRIF will calculate your minimum withdrawal amount each year. You dip into your savings. However, the rest of the money can grow tax-free in the RRIF.
Note: Is your spouse or common-law partner younger than you? You can extend the term of the RRIF. How? ‘Or’ What? By basing the calculation of withdrawals on his age rather than yours. If you choose this option, it must be registered when you open your RRIF account.
When should you start withdrawing funds from your RRIF?
You must start withdrawing money from your RRIF the calendar year after opening. For example, if you opened an RRIF in 2021, you will need to retire in 2022.
What if you don’t need the money right away?
You pay tax when you withdraw money from your RRIF. Don’t need that money right away? Options exist to make the most of your mandatory withdrawals. Have you paid tax on your RRIF withdrawal and have unused contribution room? You can allocate the money withdrawn to a tax-free savings account (TFSA). This way, it can continue to grow tax-free. You could also give it to non-registered investments. However, you will have to pay tax on the growth of investments in the non-registered account.
Six beneficial ways to use your TFSA
TFSA: 5 common mistakes to avoid
How do I transfer money into an RRIF?
You can fund your RRIF in several ways. Here are the most common:
By transferring from
